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Kenneth Cesta

First Circuit Affirms Order Compelling Arbitration and Rejecting Claim By Postmates Couriers of Exemption From the FAA

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In Damon Immediato, et al., v. Postmates, Inc., the First Circuit addressed the issue of whether couriers who deliver goods from local restaurants and grocery stores are “transportation workers engaged in interstate commerce such that they are exempt from the Federal Arbitration Act.”  The court affirmed the district’s court’s decision granting defendant’s motion to compel arbitration and concluding that the plaintiffs were not exempt from the FAA.

The defendant, Postmates, operates an online platform that allows customers to order local takeout and certain products from local grocery stores. Plaintiffs are couriers for Postmates who made deliveries to customers in the Boston area. When plaintiffs registered as couriers, they were required to accept Postmates “Fleet Agreement” which, among other things, classifies the couriers as independent contractors and includes a mutual arbitration provision governed by the FAA. The arbitration provision requires all disputes be resolved through final and binding arbitration under AAA Rules, but allows a courier to opt-out of the arbitration provision within 30 days of accepting the Fleet Agreement. Plaintiffs did not opt out of the arbitration provision.

Plaintiffs filed an action in Massachusetts state court on behalf of themselves and a putative class of couriers, alleging Postmates misclassified them as independent contractors and, as employees, they were entitled to benefits such as reimbursement of business expenses, the payment of a minimum wage, and paid sick leave.  Postmates removed the action to federal court and moved to compel arbitration. Plaintiffs opposed the motion contending they were exempt from the FAA under 9 U.S.C. §1. The district court determined the exemption did not apply, granted Postmates’ motion to compel arbitration, and stayed the federal action pending the outcome of the arbitration. Plaintiffs accepted individual offers of judgment in the arbitration and the district court dismissed the case.

On appeal, the plaintiffs argued they “belong to a class of workers encompassed by the residual clause of section 1 and are therefore outside the grasp of the FAA.”  Section 1 of the FAA provides, in part, “nothing herein contained shall apply to contracts of employment of seamen, railroad employees, or any other class of workers engaged in foreign or interstate commerce.” The court noted, however, that the Supreme Court “has interpreted the residual clause of this exemption to apply only to ‘transportation workers,’ meaning workers who play a ‘necessary role’ in the interstate transport of goods.” [Citation omitted]. The court rejected plaintiffs’ argument, concluding “couriers who deliver meals and goods as the result of local purchases from local vendors are not within a class of workers ‘engaged in foreign or interstate commerce’ who are exempt from the FAA under section 1.” Plaintiffs also contended on appeal if they are not exempt from the FAA under section 1, then their contracts with Postmates must be outside the coverage of section 2 of the FAA, “which extends the FAA’s reach to all contracts ‘involving’ interstate commerce. 9 U.S.C. §1, 2.” The court rejected this argument as well, concluding “appellants’ employment contracts are covered under section 2 of the Act because couriers who make local retail deliveries affect interstate commerce, but those contracts are not exempt under section 1 because the appellants are not part of a class of workers actively engaged in the interstate transport of goods. The district court was therefore required to compel arbitration according to the terms agreed to by the parties.”

Damon Immediato, et al, v. Postmates, Inc., No. 22-1015 (1st Cir. Nov. 29, 2022)

Second Circuit Rejects Application of the Functus Officio Doctrine and Affirms District Court’s Order Denying Petition To Vacate Arbitration Award and Granting Cross-Petition to Confirm Award

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In Smarter Tools, Inc., v. Chongqing Seni Import & Export Trade Co., Ltd., et al., the Second Circuit affirmed the district court’s order denying Smarter Tools, Inc.’s (STI) petition to vacate an arbitration award and granting Chongqing Seni Import & Export Trade Co. Inc. and Chongqing AM Pride Power and Machinery Co., Ltd.’s (collectively, SENCI) cross-petition to confirm the award.

STI is engaged in the business of buying and selling tools and power products. SENCI produces and sells gas-powered generators. STI and SENCI entered into contracts for STI’s purchase of thousands of generators from SENCI. The purchase orders for the generators included an arbitration provision “providing that any dispute arising from the contracts would be resolved by arbitration, to be conducted in New York City under the International Commercial Dispute Resolution Procedure of the American Arbitration Association.” After disputes arose between the parties regarding the generators, SENCI initiated arbitration to collect amounts due from STI. STI filed a counterclaim contending that several of the generators were defective and failed to comply with applicable state and federal regulations, resulting in damages to STI. The parties agreed the arbitrator should provide a reasoned award. After the hearing, the arbitrator rendered an award, which (i) included a brief description of the proceedings, (ii) excluded the testimony of STI’s expert witness and five exhibits related to that testimony, and (iii) included two findings. The arbitrator awarded SENCI approximately $2.4 million and denied all of STI’s claims against SENCI.

STI filed a petition to vacate the arbitration award contending it was not a “reasoned award” as required, and that the arbitrator “manifestly disregarded the law.” SENCI filed a cross-petition to confirm the award. The district court found the arbitrator’s award did “‘not meet the standard for a reasoned award because it contains no rationale for rejecting STI’s claims’” and “‘the arbitrator exceeded his authority in issuing an award that does not meet the standard of a reasoned opinion.’” The district court remanded the matter to the arbitrator for clarification of his findings. The arbitrator then issued a final amended award providing the same relief for the parties, but also including a further explanation of why STI’s counterclaims failed. STI again moved to vacate the amended award, and SENCI moved to confirm the award. The district court found the arbitrator’s amended award provided sufficient details to constitute a reasoned award and granted SENCI’s cross-petition to confirm the award and denied STI’s petition to vacate.

In affirming the district court’s order, the Second Circuit first noted the opinion in Porzio v. Dresdner, Kleinwort, Benso, N. Am., LLC, 497 F.3d 133 (2d Cir. 2007) confirming the “extremely deferential standard of review” that should be applied in reviewing arbitral awards “[t]o encourage and support the use of arbitration by consenting parties.” The court noted “‘[o]nly a barely colorable justification for the outcome reached by the arbitrators is necessary to confirm the award.’” The court then rejected STI’s argument that the doctrine of functus officio barred the district court from remanding the matter to an arbitrator for a reasoned award. The doctrine of functus officio provides “once arbitrators have fully exercised their authority to adjudicate the issues submitted to them, their authority over those questions is ended, and the arbitrators have no further authority, absent agreement by the parities, to redetermine those issues”. The court found “where, as here, a district court determines that the arbitrator failed to produce an award in the form agreed to by the parties, remand for a properly conformed order is a permissible choice. It simply makes no sense to redo an entire arbitration proceeding over an error in the form of the award issued after the hearing.”

The court also rejected STI’s argument that vacatur was mandated under the FAA. The court held that “applying the strong presumption in favor of enforcing an arbitration award, the arbitrator’s failure to render a reasoned award does not fall within a narrow reading of Section 10(a)(4) and did not require vacatur of the original award.” The court found “where, as here, the parties agree that the arbitrator will produce a reasoned award, the failure to provide one renders the award ‘imperfect in matter of form not affecting the merits of the controversy.’ 9 U.S.C. §11(c).” Finally, the court rejected STI’s claim that the district court also erred in not finding the arbitrator acted in “manifest disregard of the law” finding those claims groundless.

Smarter Tools, Inc., v. Chongqing Seni Import & Export Trade Co., Inc., et al., No. 21-724 (2d Cir. Jan. 17, 2023)

Ninth Circuit Affirms District Court’s Order Denying Online Cryptocurrency Exchange’s Motion to Compel Arbitration of Users’ Claims

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In David Suski v. Coinbase, Inc., et al., the Ninth Circuit affirmed a district court order denying defendant Coinbase, Inc.’s motion to compel arbitration, concluding that issues surrounding a forum selection clause were not delegated to the arbitrator and were for the court to decide. The court further found that the forum selection clause in Coinbase’s official rules superseded the user agreement’s arbitration clause.

The case involved claims brought by the plaintiff and other users of Coinbase’s online cryptocurrency exchange who opted into Coinbase’s “Dogecoin Sweepstakes” in June 2021. When opening their accounts, the plaintiffs agreed to a Coinbase user agreement which included an arbitration provision. The plaintiffs later opted into the sweepstakes’ official rules, which included a forum selection clause providing that “California courts have exclusive jurisdiction over any controversies regarding the sweepstakes.” The plaintiffs later brought claims under California’s False Advertising Law, Unfair Competition Law, and Consumer Legal Remedies Act against Coinbase and another defendant hired by Coinbase to market and run the sweepstakes. Coinbase filed a motion to compel arbitration of the plaintiffs’ claims. The district court denied the motion, concluding that the “delegation clause” in the user agreement “did not delegate to the arbitrator the issue of which contract [the User Agreement or Official Rules] governed the dispute.” Applying state law principles of contract interpretation, the district court then ruled that the official rules superseded the user agreement, and that the arbitration clause contained in the user agreement did not apply to the plaintiffs’ claims.

The Ninth Circuit affirmed the district court’s order and addressed Coinbase’s argument that the district court erred when it concluded that the user agreement did not delegate to the arbitrator the issue of whether the forum selection clause in the official rules superseded the arbitration clause in the user agreement. The court noted its decision in Oracle Am. Inc. v. Myriad Grp. A.G., (9th Cir. 2013) that “[w]hether the court or the arbitrator decides arbitrability is an issue for judicial determination unless the parties clearly and unmistakably provide otherwise.” The court then found that the district court correctly ruled that in this case, the issue of whether the forum selection clause in the official rules superseded the arbitration clause in the user agreement “was not delegated to the arbitrator, but rather was for the court to decide.”

The court then addressed Coinbase’s argument that the district court erred when it concluded that the forum selection clause in the official rules superseded the arbitration clause contained in the user agreement. The court noted that state law principles of contract formation and interpretation apply “when determining whether parties have agreed to submit to arbitration” and when there are two contracts dealing with the same subject matter without addressing whether the second contract is a substitute for the first, “the two contracts must be interpreted together and the latter contract prevails to the extent they are inconsistent.” The court agreed with the district court that given the conflict between the official rules and the user agreement, “the Official Rules’ forum selection clause supersedes the User Agreement’s arbitration clause” since the official rules came after the user agreement.

David Suski, et al. v. Coinbase, Inc., et al., No. 22-15209 (9th Cir. Dec. 16, 2022)

Seventh Circuit Affirms District Court Decision Refusing To Refer Putative Class Action Under the Illinois Biometric Information Privacy Act to Arbitration

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In Joshua Johnson v. Mitek Systems, Inc., the Seventh Circuit affirmed a district court order denying defendant Mitek Systems, Inc.’s motion to compel arbitration of the plaintiff’s claims brought under the Illinois Biometric Information Privacy Act. The case before the district court involved a putative class action brought on behalf of Joshua Johnson, and all others similarly situated, in Illinois state court. Mitek removed the matter to the U.S. District Court for the Northern District of Illinois pursuant to the Class Action Fairness Act. A company referred to in the decision as HyreCar “is an intermediary between people who own vehicles and other people who would like to drive for services such as Uber and GrubHub.” HyreCar verifies an applicant’s background and in so doing, sends certain personal information about the applicant to Mitek, which “provides identity-verification services.” Johnson alleges that Mitek used his information without the consent required by section 15 of BIPA.

Johnson’s contract with HyreCar included an arbitration clause which obligated Johnson to arbitrate any claims “with a long list of entities” including “all authorized or unauthorized users or beneficiaries of services or goods provided under the Agreement.” After removing the case to the district court, Mitek filed a motion to compel arbitration which was denied. Mitek then filed an immediate appeal to the Seventh Circuit pursuant to 9 U.S.C. §16(a)(1), contending that it is “a beneficiary of services or goods provided under the Agreement,” thereby requiring that the plaintiff arbitrate his claims against Mitek pursuant to the arbitration clause in the agreement he signed with HyreCar.

The Seventh Circuit rejected Mitek’s claims that the plaintiff is required to arbitrate his claims, finding that “‘the services or goods provided under the Agreement’ are vehicles, plus some ancillary aid that HyreCar furnishes to drivers.” The court further found that Mitek “does not receive ‘services or goods … under the Agreement’ between Johnson and HyreCar” and that Mitek cannot be classified as a “user” of HyreCar’s services or goods. The court noted that while courts “cannot disfavor arbitration, compared with other agreements” they may not “jigger the rules to promote arbitration” … and that “it would stretch contractual language past the breaking point” to conclude that Johnson or any of the other drivers agreed to arbitrate with Mitek. The court also rejected Mitek’s claim that the plaintiff should be equitably estopped from litigating the lawsuit, finding that the plaintiff “has not done anything that would estop himself from litigating this suit.” The court affirmed the district court’s decision refusing to refer the matter to arbitration, and remanded the case for a determination of whether the action may proceed as a class action “except for the claim under §15(c) of BIPA” which the court held must be remanded to state court.

Joshua Johnson v. Mitek Systems, Inc., No. 22-1830 (7th Cir. Dec. 21, 2022)

Chancery Division of the High Court of England Sanctions Business Transfer Scheme Involving Applicant Insurance Companies Under the Financial Services Markets Act

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In Phoenix Life Ltd, Re, also known as: Reassure Life Ltd, Re Phoenix Life Assurance Europe Designated Activity Co, Re, the Chancery Division of the High Court of England sanctioned a plan by the applicant companies Reassure Life Ltd (RLL), Phoenix Life Ltd (PLL), and Phoenix Life Assurance Europe (PLAE) of an insurance business transfer scheme under the Financial Services and Markets Act.

United Kingdom insurers, PLL and RLL, were engaged in “closed-fund run off in the long-term sector” and PLAE was an Irish designated activity company established to facilitate the business transfer scheme. The business to be transferred had been written in Ireland, Iceland, Germany, Norway, and Sweden. The purpose of the scheme was to “ensure that policyholders in those countries obtained the full range of benefits following the UK’s departure from the European Union” by transferring “to PLAE the legal rights and obligations of PLL and RLL relating to the transferring policies together with their associated assets and liabilities.” Claims related to misselling and maladministration were not included in the scheme.

The conclusions of an independent expert who reviewed the scheme were submitted to and accepted by the Court, including the expert’s findings that “the scheme would not have a material adverse effect on the security of the benefits under the transferring policies … and the reasonable expectations of the transferring policyholders in respect of their benefits…” The Court also agreed with the independent expert’s conclusions that the nontransferring policyholders would not suffer any material adverse effects as a result of the scheme. The Court sanctioned the scheme concluding that “the technical requirements of the legislation had been complied with” and that the independent expert’s conclusion regarding PLAE’s financial strength was reasonable. In approving the scheme, the Court also agreed with several other conclusions reached by the independent expert, including that the reinsurance arrangements involved in the scheme would not create a “material adverse effect on the security of the benefits under the policies to be transferred under the scheme.”

Phoenix Life Ltd, Re, also known as: Reassure Life Ltd, Re Phoenix Life Assurance Europe Designated Activity Co, Re, (Chancery Division, High Court of England, Oct. 24, 2022)